Financial Times: Shell's corner

Published: April 15 2004

Is all the bad news priced in at Royal Dutch/Shell? Investors shrugged off cost overruns in Russia and delays to its Nigerian deep-water project. They seemed to display a similar attitude to the "it wasn't me" defence by Walter van de Vijver, the deposed head of exploration and production. His claim that Shell's committee of managing directors was informed without delay of reserve booking problems has not further dented the share price.

Strong crude prices in the seasonally weak second quarter have lent support to oil stocks. With the price discount to BP at its widest since early 1999, Shell may also have been dragged up by its rival's strong run since announcing share buybacks.

The rot may have stopped, but there are few potential catalysts for a narrowing of the spread with BP. Mr van de Vijver's claims, if correct, highlight the need for structural change. But Shell is stuck in "listening" mode. Amid concerns that its internal audit report may be a whitewash, investors could conclude that little has changed.

Buying interest close to the year's low at 350p, from value funds attracted by Shell's yield, offers reassurance. Based on 2004 debt-adjusted cash flow multiples, Shell is about 20 per cent cheaper than BP. But BP offers superior reserve replacement and production growth, with share buybacks - low on Shell's agenda - compensating for a lower dividend yield. While it is always tempting to buy into a recovery story early, the discount appears justified.